[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Proposed Rules]
[Pages 18445-18454]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-7812]
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FEDERAL RESERVE SYSTEM
12 CFR Part 234
[Regulation HH; Docket No. R-1412]
RIN 7100-AD71
Financial Market Utilities
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: Under section 805(a)(1)(A) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the ``Dodd-Frank Act''), the Board
of Governors of the Federal Reserve System (the ``Board'') is required
to promulgate risk-management standards governing the operations
related to the payment, clearing, and settlement activities of certain
financial market utilities (``FMUs'') that are designated as
systemically important by the Financial Stability Oversight Council
(the ``Council''). In addition, under section 806(e) of the Dodd-Frank
Act, the Board is required to prescribe regulations setting forth the
standards for determining when advance notice is required to be
provided by a designated FMU for which the Board is the Supervisory
Agency when the designated FMU proposes to change its rules,
procedures, or operations that could materially affect the nature or
level of risks presented by the designated FMU. The Board is proposing
new Part 234 to Title 12 of the Code of Federal Regulations to
implement these provisions of the Dodd-Frank Act.
DATES: Comments on this notice of proposed rulemaking must be received
by May 19, 2011.
ADDRESSES: You may submit comments, identified by Docket No. R-1412 and
RIN No. AD-7100-AD71, by any of the following methods:
Agency Web site: http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jennifer A. Lucier, Manager (202) 872-
7581, Division of Reserve Bank Operations and Payment Systems;
Christopher W. Clubb, Senior Counsel (202) 452-3904, or Kara L.
Handzlik, Senior Attorney (202) 452-3852, Legal Division; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
[[Page 18446]]
I. Background
A. Financial Market Utilities
FMUs, such as payment systems, central securities depositories, and
central counterparties, are critical components of the nation's
financial system. FMUs are multilateral organizations that provide the
essential infrastructure to clear and settle payments and other
financial transactions, upon which the financial markets and the
broader economy rely to function effectively. Financial institutions,
such as banks, participate in FMUs pursuant to a common set of rules
and procedures, a technical infrastructure, and a risk-management
framework. The basic risks that FMUs must manage include credit risk,
liquidity risk, settlement risk, operational risk, and legal risk.
These risks arise between financial institutions and FMUs as they
settle payments and other financial transactions. The FMUs and their
participating institutions are responsible for managing these risks on
an individual and a collective basis.
Financial stability requires that the financial infrastructure,
including FMUs, be robust and well managed. If a systemically important
FMU fails to perform as expected or fails to measure, monitor, and
manage its risks effectively, it could pose significant risk to its
participants and the financial system more broadly. For example, the
inability of an FMU to complete settlement on time could create credit
or liquidity problems for its participants or other FMUs. An FMU,
therefore, should have an appropriate and robust risk-management
framework, including sound governance arrangements, and appropriate
policies and procedures to measure, monitor, and manage its risks.
B. Dodd-Frank Wall Street Reform and Consumer Protection Act
Title VIII of the Dodd-Frank Act, titled the ``Payment, Clearing,
and Settlement Supervision Act of 2010,'' was enacted to mitigate
systemic risk in the financial system and to promote financial
stability, in part, through enhanced supervision of designated FMUs.\1\
Under section 803, an FMU is defined as a person that manages or
operates a multilateral system for the purpose of transferring,
clearing, or settling payments, securities, or other financial
transactions among financial institutions or between financial
institutions and the person. Pursuant to section 804 of the Dodd-Frank
Act, the Council is required to designate those FMUs that the Council
determines are, or are likely to become, systemically important.\2\
Designation by the Council makes an FMU subject to the supervisory
framework set out in Title VIII.
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\1\ The Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376, was
signed into law on July 21, 2010.
\2\ For these purposes, section 803(9) of the Dodd-Frank Act
defines ``systemically important'' as a situation in which the
failure of or a disruption to the functioning of an FMU could
create, or increase, the risk of significant liquidity or credit
problems spreading among financial institutions or markets and
thereby threaten the stability of the financial system of the United
States. 12 U.S.C. 5462(9). The Council issued an advance notice of
proposed rulemaking on the criteria for FMU designations on November
23, 2010 (see 75 FR 79982 (Dec. 21, 2010)).
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Section 805(a)(1)(A) of the Dodd-Frank Act requires the Board to
prescribe, by rule or order, risk-management standards governing the
operations related to the payment, clearing, and settlement activities
of certain designated FMUs. With respect to a designated FMU that is a
derivatives clearing organization registered under section 5b of the
Commodity Exchange Act or a clearing agency registered under section
17A of the Securities Exchange Act of 1934 (collectively, ``designated
clearing entities''), the Commodity Futures Trading Commission
(``CFTC'') or the Securities and Exchange Commission (``SEC''),
respectively, may each prescribe regulations, in consultation with the
Council and the Board, containing applicable risk-management
standards.\3\
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\3\ Dodd-Frank Act section 805(a)(2) 12 U.S.C. 5464(a)(2).
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In prescribing the standards, section 805(a)(1) requires the Board
to take into consideration relevant international standards and
existing prudential requirements.\4\ In addition, as set out in section
805(b) of the Dodd-Frank Act, the objectives and principles for the
risk-management standards are to (1) promote robust risk management,
(2) promote safety and soundness, (3) reduce systemic risks, and (4)
support the stability of the broader financial system. Section 805(c)
of the Dodd-Frank Act also states that risk-management standards may
address areas such as (1) risk-management policies and procedures, (2)
margin and collateral requirements, (3) participant or counterparty
default policies and procedures, (4) the ability to complete timely
clearing and settlement of financial transactions, (5) capital and
financial resource requirements for designated FMUs, and (6) other
areas that are necessary to achieve the objectives and principles for
risk-management standards in section 805(b). Designated FMUs are
required to conduct their operations in compliance with the applicable
risk-management standards.
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\4\ Section 805(a)(2) similarly requires the CFTC and SEC to
take into consideration relevant international standards and
existing prudential requirements when prescribing regulations
containing risk-management standards for designated clearing
entities.
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In addition to compliance with the applicable risk-management
standards, section 806(e)(1)(B) of the Dodd-Frank Act requires a
designated FMU to provide at least 60 days' advance notice to its
Supervisory Agency (as defined below) of any proposed change to its
rules, procedures, or operations that could, as defined in rules of
each Supervisory Agency, materially affect the nature or level of risks
presented by the designated FMU. Each Supervisory Agency must prescribe
regulations that define and describe the standards for determining when
such advance notice is required. Under section 803(8) of the Dodd-Frank
Act, a ``Supervisory Agency'' means the federal agency that has primary
jurisdiction over a designated FMU under federal banking, securities,
or commodity futures laws.\5\
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\5\ A Supervisory Agency includes the SEC and CFTC with respect
to their respective designated clearing entities (as defined above),
the appropriate federal banking agencies with respect to FMUs that
are institutions described in section 3(q) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q)), and the Board with respect to a
designated FMU this is otherwise not subject to the jurisdiction of
any of the agencies listed above.
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II. Explanation of Proposed Rules
A. Authority, Purpose, and Scope
Proposed Sec. 234.1(a) clarifies that sections 805, 806, and 810
of the Dodd-Frank Act provide the statutory authority for the Board to
promulgate the proposed part. Proposed Sec. 234.1(b) explains that the
proposed rules include risk-management standards for designated FMUs
and that this part does not apply to designated clearing entities
governed by the risk-management standards promulgated by the CFTC or
the SEC, as appropriate. Proposed Sec. 234.1(b) also clarifies that
the requirements and procedures in this part for a designated FMU that
proposes to make a change to its rules, procedures, or operations that
could materially affect the nature or level of risks presented by the
designated FMU apply only to designated FMUs for which the Board is the
Supervisory Agency.
B. Definitions
The proposed rule includes definitions that are necessary to
implement the rules. Several definitions (including ``designated
financial market
[[Page 18447]]
utility,'' ``financial market utility,'' and ``Supervisory Agency'')
reference the statutory language in section 803 of the Dodd-Frank Act.
Other proposed definitions (including ``central counterparty,''
``central securities depository,'' and ``payment system'') are based on
similar terms used in the risk-management standards issued by the
Committee on Payment and Settlement Systems (the ``CPSS'') and the
Technical Committee of the International Organization of Securities
Commissions (``IOSCO''), which are discussed in detail below. The Board
is requesting comment on all aspects of the proposed definitions except
those defined in the Dodd-Frank Act. In particular, the Board requests
comment on whether the definitions are clear and sufficiently detailed
and whether additional definitions are needed to implement the proposed
rules.
C. Risk-Management Standards for Designated FMUs
As noted above, in prescribing risk-management standards for
designated FMUs, section 805(a) of the Dodd-Frank Act directs the Board
to take into consideration relevant international standards and
existing prudential requirements. The current international standards
most relevant to risk management of FMUs are the standards developed by
the CPSS and IOSCO.\6\ In 2001, the CPSS published a set of principles
for the design and operation of systemically important payment systems
(the ``Core Principles''). That same year the CPSS and IOSCO jointly
issued a set of minimum standards for securities settlement systems
(the ``Recommendations for Securities Settlement Systems''). In 2004,
the CPSS and IOSCO jointly published recommendations for the risk
management of central counterparties (the ``Recommendations for Central
Counterparties,'' and collectively with the Recommendations for
Securities Settlement Systems, the ``CPSS-IOSCO Recommendations''). The
Board has adopted the three sets of standards in its Policy on Payment
System Risk (``PSR policy''). Furthermore, the Board has been guided by
this policy, in conjunction with relevant laws and other Federal
Reserve policies, when exercising its authority in (1) supervising
state member banks, Edge and agreement corporations, bank holding
companies, and clearinghouse arrangements, including the exercise of
authority under the Bank Service Company Act, where applicable; (2)
setting or reviewing the terms and conditions for use of Federal
Reserve payment and settlement services by system operators and
participants; (3) developing and applying policies for the provision of
intraday credit to Reserve Bank account holders; and (4) interacting
with other domestic and foreign financial system authorities on
payments and settlement risk issues.\7\ Thus, the Board has had several
years experience with interpreting and applying the three sets of
standards to payment, clearing, and settlement systems.
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\6\ See full reports for the Core Principles for Systemically
Important Payment Systems (Core Principles) (http://www.bis.org/publ/cpss43.htm) and the CPSS-IOSCO Recommendations for Securities
Settlement Systems (Recommendations for Securities Settlement
Systems) (http://www.bis.org/publ/cpss46.htm) and Central
Counterparties (http://www.bis.org/publ/cpss64.htm) (Recommendations
for Central Counterparties).
\7\ See the full PSR policy at http://www.federalreserve.gov/paymentsystems/psr_policy.htm. The Board requested comment on these
standards prior to adopting them as part of its PSR policy. See 71
FR 36800 (June 28, 2006) and 72 FR 2518 (Jan. 19, 2007).
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The Board believes that the Core Principles and the CPSS-IOSCO
Recommendations further the objectives and principles for designated
FMU standards set out in section 805(b) of the Dodd-Frank Act. These
international standards were formulated by central banks and securities
regulators to promote sound risk-management practices, encourage the
safe design and operation of relevant FMUs, reduce systemic risk, and,
in certain instances, improve selected market practices or actions by
regulators. The Federal Reserve collaborated with participating
financial system authorities in developing the three sets of standards.
In addition, the SEC and CFTC participated in the development of the
CPSS-IOSCO Recommendations. The Core Principles and Recommendations for
Securities Settlement Systems are also part of the Financial Stability
Board's Compendium of Standards, which has been widely recognized,
supported, and endorsed by U.S. authorities as integral to
strengthening the stability of the financial system. Furthermore, while
the Recommendations for Central Counterparties have not been recognized
formally by the Financial Stability Board, they are widely accepted and
applied by central banks and market regulators around the world. The
Board, therefore, believes that the Core Principles and CPSS-IOSCO
Recommendations are an appropriate basis for risk-management standards
for designated FMUs, and the Board is proposing to adopt by regulation
a set of standards based on the Core Principles and CPSS-IOSCO
Recommendations to implement section 805(a) of the Dodd-Frank Act.
The Board believes, however, that it should adopt a modified
version of the standards for the purpose of section 805(a). In
particular, the Board is proposing to adopt by regulation only those
Core Principles and CPSS-IOSCO Recommendations, or portions thereof,
that directly apply to an FMU's risk-management or operational
framework, rather than those standards that apply more generally to
financial markets (for example, market convention, pre-settlement
activities) or regulators (for example, regulation and oversight). The
Board acknowledges that the scope of the standards is broad. For
example, the Core Principles and the CPSS-IOSCO Recommendations contain
a standard requiring a clear and well founded legal framework, which
includes legislation and administrative rulemaking. While the Board
acknowledges that an FMU cannot control or dictate legislation or
regulatory rulemaking, it expects that a designated FMU will manage its
legal risk within the context of current applicable statutes and
regulations, in ways such as ensuring that its rules, procedures, and
contractual provisions are clear and accessible to participants and
such rules, procedures, and contractual provisions will be enforceable
with a high degree of certainty. In order to facilitate compliance,
designated FMUs may refer to the CPSS and CPSS-IOSCO documents for
background.
The Board expects to interpret and apply the proposed standards
consistent with its interpretation and application of those standards
under its existing PSR policy. For instance, when considering the
adequacy of risk controls or the sufficiency of financial resources
that a payment system, central securities depository, or central
counterparty would require to complete timely settlement in the event
the participant with the largest settlement obligation is unable to
complete settlement, the Board usually has interpreted the term
``participant'' to mean the largest family of affiliated participants
where there is more than one affiliated participant.\8\ Furthermore,
the Board would continue to expect a central securities depository that
extends intraday credit to its participants to institute risk controls
that cover fully its credit risk exposure to all participants, not only
the participant with the largest payment
[[Page 18448]]
obligation.\9\ In addition, the Board would expect a designated FMU to
meet the sound practices set forth in the ``Interagency Paper on Sound
Practices to Strengthen the Resilience of the U.S. Financial System''
as one element of complying with the risk-management standards in
proposed Sec. Sec. 234.3(a)(7) and 234.4(a)(4).\10\ Specifically, a
designated FMU should develop the capacity to recover and resume its
payment, clearing, and settlement activities within the business day on
which the disruption occurs with the overall goal of achieving recovery
and resumption within two hours after an event.\11\ The Board requests
comment on whether these provisions need further definition in the text
of the proposed standards.
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\8\ See, for example, proposed standards in Sec. Sec.
234.3(a)(5) and 234.4(a)(18).
\9\ See proposed standard in Sec. 234.4(a)(15).
\10\ The interagency paper is available at http://www.federalreserve.gov/boarddocs/SRLETTERS/2003/SR0309a1.pdf.
\11\ This interpretation is consistent with the Board's
supervision of banking organizations that are core clearing and
settlement organizations or act as large-value payment system
operators. See Supervision and Regulation letter 03-9 (May 28, 2003)
at http://www.federalreserve.gov/boarddocs/srletters/2003/sr0309.htm.
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The Board believes that the adoption of risk-management standards
under Title VIII that are based on the current international standards
will have several important benefits, including easing the potential
burden for designated FMUs to comply with the standards; reducing
potential conflicts among regulators regarding prudential requirements;
providing a common framework among relevant regulators for overseeing
and assessing the risks and risk management of FMUs with cross-market,
cross-border, or cross-currency operations; aiding international
efforts to strengthen the risk management of critical FMUs; and
reducing systemic risk.
The Board requests comment on the set of standards set out in the
proposed rule and the use of CPSS and CPSS-IOSCO documents as further
information. In particular, given the familiarity of most FMUs with the
existing relevant international standards, the Board requests comment
on whether the proposed standards provide sufficient guidance for
designated FMUs to comply with the standards pursuant to Title VIII of
the Dodd-Frank Act.
The CPSS and IOSCO are currently reviewing the three sets of
international standards. This review is intended to strengthen and
clarify the standards based on experience with the Core Principles and
CPSS-IOSCO Recommendations since their publication and to incorporate
lessons learned during the recent financial crisis. The CPSS and IOSCO
published a consultative report on March 10, 2011; final international
standards are expected in early 2012.\12\ At that time, the Board
anticipates that it will review the new standards, consult with other
appropriate agencies and the Council, and likely seek public comment on
the adoption of revised standards for designated FMUs under section
805(a) of the Dodd-Frank Act based on the new international standards.
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\12\ See consultative report for Principles for Financial Market
Infrastructures at http://www.bis.org/publ/cpss94.htm.
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Payment systems. Proposed Sec. 234.3(a) sets out risk-management
standards for designated FMUs that operate as payment systems, in
accordance with section 805(a) of the Dodd-Frank Act. The Board is
proposing a set of standards based on the Core Principles for such
designated FMUs. The Core Principles are widely accepted by the
international regulatory community, and numerous payment systems around
the world already follow them. These standards address the types of
areas of supervisory concern for designated FMUs set out in section
805(c) of the Dodd-Frank Act. For example, the standards address risk-
management policies and procedures, participant default policies and
procedures, and the ability to complete timely settlement of payments.
Proposed Sec. 234.3(b) clarifies that the Board will apply the
standards set out in proposed Sec. 234.3(a) in its supervision of
designated FMUs that operate as payment systems and for which the Board
is the Supervisory Agency. All designated FMUs are expected to employ a
risk-management framework that is appropriate for their risks, so the
Board may require a particular designated FMU to exceed the standards
set out in the proposed rules in this notice. To that end, Sec.
234.3(b) states that the Board may, by order, apply heightened risk-
management standards to a particular FMU in response to the risks
presented by that FMU.
The Board requests comment on all aspects of the appropriateness of
the proposed standards for designated FMUs that are payment systems,
including whether there are any areas of supervisory concern regarding
a payment system's operations that are not sufficiently addressed by
the proposed rules. The Board also requests comment on whether the
proposed standards achieve the statutory objectives outlined above to
(1) promote robust risk management, (2) promote safety and soundness,
(3) reduce systemic risks, and (4) support the stability of the broader
financial system.
Central securities depositories and central counterparties.
Proposed Sec. 234.4(a) of the proposed rule sets out risk-management
standards for designated FMUs that operate as central securities
depositories or central counterparties, in accordance with section
805(a) of the Dodd-Frank Act. Each proposed standard states whether it
is applicable to a central securities depository, a central
counterparty, or both.
Most designated FMUs that operate as central securities
depositories or central counterparties will be designated clearing
entities subject to the risk-management standards promulgated by the
CFTC or SEC. The Board is proposing standards for designated FMUs that
operate as central securities depositories, central counterparties, or
both, to address the unlikely event that a designated FMU operates as a
central securities depository or central counterparty and is not
required to be registered as a clearing agency or derivatives clearing
organization with the SEC or CFTC, respectively. Pursuant to section
805(a)(1) of the Dodd-Frank Act, the Board's risk-management standards
apply to any designated FMU that is otherwise not subject to the
jurisdiction of the SEC or the CFTC.\13\
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\13\ 12 U.S.C. 5464(a)(1).
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The Board is proposing a set of standards for such designated FMUs
that is based on the majority of the CPSS-IOSCO Recommendations
presented in a modified format. Specifically, the Board is proposing to
prescribe only those portions of the CPSS-IOSCO Recommendations that
apply directly to FMUs, rather than those portions that apply to market
convention, pre-settlement activities, and regulation and oversight,
which are outside the control of the individual FMUs and are more
appropriately addressed by other entities.\14\ While the Board endorses
the CPSS-IOSCO
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Recommendations in their entirety as a policy matter, its primary
interest for purposes of this rulemaking is in those recommendations
related to the clearing and settlement aspects of financial
transactions, including the delivery of securities or other financial
instruments against payment, and related risks. In addition, the
standards in the Recommendations for Securities Settlement Systems and
the Recommendations for Central Counterparties that overlap
significantly have been consolidated to avoid repetition.
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\14\ The Board is not proposing to include the following CPSS-
IOSCO Recommendations as risk-management standards for designated
FMUs: Recommendations 2 (trade confirmation), 3 (settlement cycles),
4 (central counterparties), 5 (securities lending), 12 (protection
of customers' securities), and 18 (regulation and oversight) of the
Recommendations for Securities Settlement Systems and recommendation
15 (regulation and oversight) in the Recommendations for Central
Counterparties. In addition, the Board is not proposing to prescribe
a rule to adopt Recommendation 16 in the Recommendations for
Securities Settlement Systems (communication procedures and
standards) because the Board believes that at this time the purpose
of this recommendation is sufficiently captured in the proposed
risk-management standard regarding the efficient operation of a
central securities depository.
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Finally, the Board has modified the margin-related standards set
forth in the Recommendations for Central Counterparties by adding two
components on testing set forth in proposed Sec. 234.4(a)(17). The
components added by the Board are consistent with the frequencies
recommended in the explanatory text of the Recommendations for Central
Counterparties; however, proposed Sec. 234.4(a)(17)(i) would introduce
more specific parameters on who may conduct model validations for
central counterparties.\15\ In conducting supervision of central
counterparties, the Board typically has required systems to employ a
qualified, independent party to conduct validations of proposed and
existing models to evaluate the performance of the model, along with
parameters and assumptions, in a range of scenarios. The Board believes
that in order for the validator to offer independent, unbiased
conclusions and recommendations, the model validation should be
performed by a person who is not responsible for developing the margin
model and does not report to a person who performs these functions. A
central counterparty's margin model is a critical component in its
risk-management framework and should be tested rigorously and validated
at least annually to ensure it is performing reliably and achieving the
desired coverage. The Board requests comment on whether the proposed
rule for model validation is sufficiently clear. The Board also
requests comment on all aspects of the proposed rule, including the
proposed frequency and whether a model validation should be triggered
as a result of any material change to a central counterparty, such as
revisions to the margin model, introduction of new products, or
formation of new margining arrangements (for example, portfolio or
cross-margining).
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\15\ Proposed Sec. 234.4(a)(17)(i)--(ii) are generally
consistent with Recommendations 4 and 5 in the Recommendations for
Central Counterparties. Proposed rule 234.4.(17)(i) is based on
Recommendation 5 (financial resources), paragraph 4.5.4, that
recommends that a central counterparty conduct comprehensive stress
tests involving a full validation of model parameters and
assumptions at least annually. Proposed Sec. 234.4(17)(ii) is based
on Recommendation 4 (margin requirements), paragraph 4.4.2, that
states that margin models and parameters should be reviewed and
backtested regularly (at least quarterly) to assess the reliability
of the methodology in achieving the desired coverage.
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The Board believes that the standards in proposed Sec. 234.4(a)
appropriately address the types of areas of supervisory concern set out
in section 805(c) of the Dodd-Frank Act. For example, the standards
address collateral requirements and the ability to complete timely
clearing and settlement of financial transactions for central
securities depositories, and margin requirements and counterparty
default policies and procedures for central counterparties.
Proposed Sec. 234.4(b) clarifies that the Board will apply the
standards in proposed Sec. 234.4(a) in its supervision of designated
FMUs that operate as a central securities depository or a central
counterparty and for which the Board is the Supervisory Agency. A
designated FMU should comply with the standards that are applicable to
it as determined by its function as a central securities depository, a
central counterparty, or both. In addition, proposed Sec. 234.4(b)
states that the Board may, by order, apply heightened risk-management
standards to a particular FMU in response to the risks presented by
that FMU, for the same reasons as discussed above regarding heightened
standards for designated FMUs operating as payment systems.
The Board requests comment on all aspects of the proposed standards
for designated FMUs that act as central securities depositories or
central counterparties, including whether there are any areas of
supervisory concern regarding the operations of a central securities
depository or a central counterparty that are not sufficiently
addressed by the proposed rules. The Board also requests comment on
whether these standards achieve the statutory objectives outlined above
to (1) promote robust risk management, (2) promote safety and
soundness, (3) reduce systemic risks, and (4) support the stability of
the broader financial system.
The Board also requests comment on all aspects of proposed rules in
Sec. Sec. 234.3 and 234.4, but, in particular, the Board requests
comment on the following specific issues:
Under Sec. Sec. 234.3(a)(5), 234.4(a)(2), 234.4(a)(15),
and 234.4(a)(18), should the Board require designated FMUs to maintain
sufficient financial resources to withstand the default by the
participant with the largest exposure or obligation in extreme but
plausible market conditions, where participant means the family of
affiliated participants where there is more than one affiliated
participant (``cover one''); or should the Board require sufficient
financial resources to withstand defaults by the two participants, plus
any affiliated participants, with the largest exposures or obligations
in extreme but plausible market conditions (``cover two'')? Should the
Board require that financial resource requirements be different for
certain types of designated FMUs in the same category, such as central
counterparties, depending on the risk and other characteristics of the
particular products that it clears or settles? What competitive
impacts, if any, should the Board consider?
How would a cover two requirement compare with the current
practices of payment, clearing, and settlement systems? What would be
the expected incremental financial resource costs, separately including
incremental liquidity costs on the system, and its participants, in
connection with potentially increasing the current cover one
requirement to a cover two requirement?
D. Material Changes to Rules, Procedures, or Operations Requiring
Advanced Notice
As noted above, section 806(e)(1) of the Dodd-Frank Act requires a
designated FMU to provide 60 days' advance notice to its Supervisory
Agency of any changes to its rules, procedures, or operations that
``materially affect the nature or level of risks presented.'' Section
806(e) further requires each Supervisory Agency to describe in a rule
what changes are considered material and thus would require advance
notice by the designated FMU. The Board is currently evaluating the
manner in which these types of advance notice should be submitted. The
Board will provide guidance at a future date regarding the advance
notice submission procedures.
Proposed Sec. 234.5(a) requires designated FMUs for which the
Board is the Supervisory Agency to provide the Board with 60 days'
advance notice of any proposed change to its rules, procedures, or
operations that could materially affect the nature or level of risks
presented by the designated FMU. The proposed rule includes procedural
requirements regarding such notices, such as the required contents of
the notices and the procedures and timing for the methods for approving
such changes. These provisions of the proposed rules essentially
reiterate
[[Page 18450]]
similar provisions in section 806(e) of the Dodd-Frank Act.
As required by section 806(e), the Board is proposing to define
under Sec. 234.5(c) changes that ``materially affect the nature or
level of risks presented'' as those that could be reasonably expected
to affect the performance of payment, clearing, or settlement functions
or the overall nature or level of risk (including credit, liquidity,
settlement, legal, or operational risks) presented by the designated
FMU. Under this proposed definition, material changes would generally
include changes that may affect the designated FMU's ability or
approach to measure or manage the risks posed by or to itself. Material
changes also include changes to the designated FMU's design that not
only affect the FMU and its direct participants, but, even when
properly implemented, could also affect the financial system more
broadly. For example, given the operational and risk interdependencies
of a designated FMU, it is possible that attempts to reduce or limit
one type of risk could lead to the concentration or creation of
different risks. Material changes, therefore, are not limited to those
changes that would adversely affect or increase the risks of the FMU,
and include those that may transfer or transform risks.
To assist designated FMUs in determining whether a proposed change
is material, the Board's proposed rule sets out a non-exclusive list of
changes that would be considered material and require advance notice to
the Board. Under the proposed rule, material changes would include, but
not be limited to, changes that affect participant eligibility or
access criteria; product eligibility; risk management; settlement
failure or default procedures; financial resources; business continuity
and disaster recovery plans; daily or intraday settlement procedures;
the scope of services, including the addition of a new service or
discontinuation of an existing service; technical design or operating
platform, which result in nonroutine changes to the underlying
technological framework for payment, clearing, or settlement functions;
or governance.
The proposed rule also includes a non-exclusive list of routine
changes to a designated FMU's rules, procedures, or operations that
will not be deemed to materially affect an FMU's nature or level of
risks or impact or cause disruption to the financial system more
broadly. The Board believes the relevant safety and soundness issues
associated with these routine changes are more appropriately addressed
through ongoing communications with the designated FMU rather than
through the formal advance notice process under section 806(e) of the
Dodd-Frank Act. For the purposes of the advance notice provision,
changes that would not be deemed to materially affect the FMU's risks
include, but are not limited to, changes to an existing rule,
procedure, or operation that do not modify the contractual rights or
obligations of the designated FMU or persons using its payment,
clearing, or settlement services; changes to an existing procedure,
control, or service that do not adversely affect the safeguarding of
securities, collateral, or funds in the custody or control of the
designated FMU or for which it is responsible; routine technology
systems upgrades; changes related solely to the administration of the
designated FMU or related to the routine, daily administration,
direction, and control of employees; or clerical changes and other
nonsubstantive revisions to rules, procedures, or other documentation.
The material and nonmaterial lists are not exhaustive regarding the
types of changes that the Board may deem material under section 806(e).
There would be many proposed changes to a designated FMU's rules,
procedures, or operations that are not included in either list. If a
designated FMU had any question regarding whether a particular change
to a rule, procedure, or operation, which was not covered by either
list, met the general materiality standard, the Board anticipates that
the FMU would contact Board staff.
The Board requests comment on all aspects of the proposed rule
regarding changes to rule, procedures, or operations of a designated
FMU. The Board requests comment on whether the proposed rule's
provisions regarding the requirements, content, and timing of advance
notices of proposed changes are clear. In addition, the Board requests
comment on whether the proposed non-exclusive illustrative lists for
material and nonmaterial changes to an FMU's rules, procedures, or
operations would be helpful to designated FMUs in determining whether
advance notice of such changes is required. The Board also requests
comment on whether there are any areas or items on either list that
should be deleted as inappropriate. Finally, the Board requests comment
on whether there are other areas or items that appropriately should be
added to either list as material or not material to an FMU's risks. In
responding to these questions, commenters are requested to explain why
they believe an item or area on either list should be deleted or added.
III. Administrative Law Matters
A. Regulatory Flexibility Act Analysis
Congress enacted the Regulatory Flexibility Act (the ``RFA'') (5
U.S.C. 601 et seq.) to address concerns related to the effects of
agency rules on small entities, and the Board is sensitive to the
impact its rules may impose on small entities. The RFA requires
agencies either to provide an initial regulatory flexibility analysis
with a proposed rule or to certify that the proposed rule will not have
a significant economic impact on a substantial number of small
entities. In accordance with section 3(a) of the RFA, the Board has
reviewed the proposed regulation. In this case, the proposed rule would
apply to FMUs that are identified and designated by the Council as
systemically important to the U.S. financial system. Based on current
information, the Board believes that the payment system FMUs that would
likely be designated by the Council would not be ``small entities'' for
purposes of the RFA, and so, the proposed rule likely would not have a
significant economic impact on a substantial number of small entities
(5 U.S.C. 605(b)). The authority to designate systemically important
FMUs, however, resides with the Council, rather than the Board, and the
Board cannot therefore be assured of the identity of the FMUs that the
Council may designate in the future. Accordingly, an Initial Regulatory
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603,
based on current information. The Board will, if necessary, conduct a
final regulatory flexibility analysis after consideration of comments
received during the public comment period.
1. Statement of the need for, objectives of, and legal basis for,
the proposed rule. The Board is proposing a regulation to implement
certain provisions of Title VIII of the Dodd-Frank Act. Section
805(a)(1)(A) of the Dodd-Frank Act requires the Board to promulgate
risk-management standards governing the operations related to the
payment, clearing, and settlement activities of designated FMUs. The
proposed rule clarifies that the Board would apply the standards set
out in the proposed rule to designated FMUs for which the Board is the
Supervisory Agency. In addition, under section 806(e) of the Dodd-Frank
Act, the Board is required to prescribe regulations setting forth the
standards for determining when advance notice is required to be
provided by a designated FMU for which the Board is the Supervisory
Agency that proposes to change its rules, procedures, or operations
that could materially affect
[[Page 18451]]
the nature or level of risks presented by the designated FMU. The Board
believes that the proposed regulation implements Congress's requirement
that the Board prescribe regulations that carry out the purposes of
Title VIII of the Dodd-Frank Act.
2. Small entities affected by the proposed rule. The proposed rule
would affect FMUs that the Council designates as systemically important
to the U.S. financial system. The Board estimates that fewer than five
large-value payment systems would meet these conditions and be affected
by this proposed rule. Pursuant to regulations issued by the Small
Business Administration (the ``SBA'') (13 CFR 121.201), a ``small
entity'' includes an establishment engaged in providing financial
transaction processing, reserve and liquidity services, or
clearinghouse services with an average revenue of $7 million or less
(NAICS code 522320). Based on current information, the Board does not
believe that any of the payment systems that would likely be designated
by the Council would be ``small entities'' pursuant to the SBA
regulation. The Board does not at this time believe that, pursuant to
section 803(8) of the Dodd-Frank Act, it would be the Supervisory
Agency for any FMU that operates as a central securities depository or
a central counterparty and that would likely be designated by the
Council. The Board seeks information and comment on the number of small
entities to which the proposed rule would apply.
3. Projected reporting, recordkeeping, and other compliance
requirements. The proposed rule imposes certain reporting and
recordkeeping requirements for a designated FMU. (See, for example,
Sec. 234.3(a)(3) of the proposed rule (requiring clearly defined
procedures for the management of credit risks and liquidity risks),
Sec. Sec. 234.5(a)(1) and (2) of the proposed rule (requiring advance
notice of changes that could materially affect the nature or level of
risks presented by the designated FMU), and Sec. Sec. 234.5(a)(2) and
(3) of the proposed rule (requiring notice of an emergency change
implemented by a designated FMU).) The proposed rule also contains a
number of compliance requirements, including the standards that the
designated FMU must meet, such as having a well-founded legal basis
under all relevant jurisdictions and having rules and procedures that
enable participants to understand clearly the FMU's impact on each of
the financial risks they incur by participation in it. Payment systems
under the Board's jurisdiction (including certain payment systems the
Board believes could be designated as systemically important) generally
already have implemented these standards, so the proposed rule would
not likely impose additional costs on those payment systems. The Board
seeks information and comment on any costs, compliance requirements, or
changes in operating procedures that would arise from the application
of the proposed rule.
4. Identification of duplicative, overlapping, or conflicting
Federal rules. The Board does not believe that any Federal rules
conflict with the proposed rule. There is an overlap between the risk-
management standards for FMUs in the proposed rule and the Board's PSR
policy; however, the proposed standards are consistent with the PSR
policy. The Board seeks comment regarding any statutes or regulations
that would duplicate, overlap, or conflict with the proposed rule.
5. Significant alternatives to the proposed rule. The Board is
unaware of any significant alternatives to the proposed rule that
accomplish the stated objectives of the Dodd-Frank Act and that
minimize any significant economic impact of the proposed rule on small
entities. FMUs that are designated as systemically important by the
Council and present similar risk profiles should be held to consistent
standards. Promoting uniform standards for designated FMUs is one of
the stated purposes of Title VIII of the Dodd-Frank Act.\16\ The
standards in the proposed rule are being proposed for adoption in part
because the payment systems that would likely be designated by the
Council are already familiar with the international standards and could
implement them with relatively less burden than if the Board adopted a
wholly new and unfamiliar set of standards at this time. Similarly, the
standards in the proposed rule for central securities depositories and
central counterparties are a consolidated and streamlined compilation.
They are based on the CPSS-IOSCO Recommendations, and most central
securities depositories and central counterparties are already familiar
with them. The Board requests comment on whether there are additional
ways to reduce regulatory burden on small entities associated with this
proposed rule.
---------------------------------------------------------------------------
\16\ See 12 U.S.C. 5461(b)(1)(A).
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B. Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR 1320, Appendix A.1), the Board reviewed the proposed rule
under the authority delegated to the Board by the Office of Management
and Budget. For purposes of calculating burden under the Paperwork
Reduction Act, a ``collection of information'' involves 10 or more
respondents. Any collection of information addressed to all or a
substantial majority of an industry is presumed to involve 10 or more
respondents (5 CFR 1320.3(c), 1320.3(c)(4)(ii)). The Board estimates
there are fewer than 10 respondents, and these respondents do not
represent all or a substantial majority of the participants in payment,
clearing, and settlement systems. Therefore, no collections of
information pursuant to the Paperwork Reduction Act are contained in
the proposed rule.
IV. Statutory Authority
Pursuant to the authority in Title VIII of the Dodd-Frank Act,
particularly sections 805(a) and 806(e) (12 U.S.C. 5464(a) and
5465(e)), the Board proposes to adopt part 234 to govern designated
financial market utilities (Regulation HH).
V. Text of Proposed Rules
List of Subjects in 12 CFR Part 234
Banks, Banking, Credit, Electronic funds transfers, Financial
market utilities, Securities.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR, Chapter II by adding part 234 as set forth below.
PART 234--DESIGNATED FINANCIAL MARKET UTILITIES (REGULATION HH)
Sec.
234.1 Authority, purpose, and scope
234.2 Definitions
234.3 Standards for payment systems
234.4 Standards for central securities depositories and central
counterparties
234.5 Changes to rules, procedures, or operations
Authority: 12 U.S.C. 5461 et seq.
Sec. 234.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the authority of sections
805, 806, and 810 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376; 12
U.S.C. 5464, 5465, and 5469).
(b) Purpose and scope. This part establishes risk-management
standards governing the operations related to the payment, clearing,
and settlement activities of designated financial market utilities. The
risk-management standards do not apply, however, to a designated
financial market utility that
[[Page 18452]]
is a derivatives clearing organization registered under section 5b of
the Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency
registered with the Securities and Exchange Commission under section
17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1), which are
governed by the risk-management standards promulgated by the Commodity
Futures Trading Commission or the Securities and Exchange Commission,
respectively, for which each is the Supervisory Agency (as defined in
Sec. 234.2). In addition, this part sets out requirements and
procedures for a designated financial market utility that proposes to
make a change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the
designated financial market utility and for which the Board is the
Supervisory Agency.
Sec. 234.2 Definitions.
(a) Central counterparty means a designated financial market
utility that interposes itself between the counterparties to trades,
acting as the buyer to every seller and the seller to every buyer.
(b) Central securities depository means a designated financial
market utility that holds securities in custody to enable securities
transactions to be processed by means of book entries or a designated
financial market utility that enables securities to be transferred and
settled by book entry either free of or against payment.
(c) Designated financial market utility means a financial market
utility (as defined in paragraph (d) of this section) that the
Financial Stability Oversight Council has designated as systemically
important under section 804 of the Dodd-Frank Act (12 U.S.C. 5463).
(d) Financial market utility has the same meaning as the term is
defined in section 803(6) of the Dodd-Frank Act (12 U.S.C. 5462(6)).
(e) Payment system means a designated financial market utility that
consists of a set of payment instructions, procedures, and rules for
the transfer of funds among system participants.
(f) Supervisory Agency has the same meaning as the term is defined
in section 803(8) of the Dodd-Frank Act (12 U.S.C. 5462(8)).
Sec. 234.3 Standards for payment systems.
(a) A designated financial market utility that operates as a
payment system should meet or exceed the following risk-management
standards with respect to its payment, clearing, and settlement
activities:
(1) The payment system should have a well-founded legal basis under
all relevant jurisdictions.
(2) The payment system's rules and procedures should enable
participants to have a clear understanding of the payment system's
impact on each of the financial risks they incur through participation
in it.
(3) The payment system should have clearly defined procedures for
the management of credit risks and liquidity risks, which specify the
respective responsibilities of the payment system operator and the
participants and which provide appropriate incentives to manage and
contain those risks.
(4) The payment system should provide prompt final settlement on
the day of value, preferably during the day and at a minimum at the end
of the day.
(5) A payment system in which multilateral netting takes place
should, at a minimum, be capable of ensuring the timely completion of
daily settlements in the event of an inability to settle by the
participant with the largest single settlement obligation.
(6) Assets used for settlement should preferably be a claim on the
central bank; where other assets are used, they should carry little or
no credit risk and little or no liquidity risk.
(7) The payment system should ensure a high degree of security and
operational reliability and should have contingency arrangements for
timely completion of daily processing.
(8) The payment system should provide a means of making payments
that is practical for its users and efficient for the economy.
(9) The payment system should have objective and publicly disclosed
criteria for participation, which permit fair and open access.
(10) The payment system's governance arrangements should be
effective, accountable, and transparent.
(b) Designated financial market utilities that operate as payment
systems and for which the Board is the Supervisory Agency must meet or
exceed the risk-management standards in Sec. 234.3(a). The Board, by
order, may apply heightened risk-management standards to an individual
designated financial market utility in accordance with the risks
presented by the designated financial market utility.
Sec. 234.4 Standards for central securities depositories and central
counterparties.
(a) A designated financial market utility that operates as a
central securities depository or a central counterparty should meet or
exceed the following risk-management standards with respect to its
payment, clearing, and settlement activities:
(1) The central securities depository or central counterparty
should have a well-founded, transparent, and enforceable legal
framework for each aspect of its activities in all relevant
jurisdictions.
(2) The central securities depository or central counterparty
should require participants to have sufficient financial resources and
robust operational capacity to meet obligations arising from
participation in the central securities depository or central
counterparty. The central securities depository or central counterparty
should have procedures in place to monitor that participation
requirements are met on an ongoing basis. The central securities
depository's or central counterparty's participation requirements
should be objective and publicly disclosed, and permit fair and open
access.
(3) The central securities depository or central counterparty
should hold assets in a manner whereby risk of loss or of delay in its
access to them is minimized. Assets invested by a central securities
depository or central counterparty should be held in instruments with
minimal credit, market, and liquidity risks.
(4) The central securities depository or central counterparty
should identify sources of operational risk and minimize them through
the development of appropriate systems, controls, and procedures; have
systems that are reliable and secure, and have adequate, scalable
capacity; and have business continuity plans that allow for timely
recovery of operations and fulfillment of the central securities
depository's or central counterparty's obligations.
(5) The central securities depository or central counterparty
should employ money settlement arrangements that eliminate or strictly
limit its settlement bank risks, that is, its credit and liquidity
risks from the use of banks to effect money settlements with its
participants and should require funds transfers to the central
securities depository or central counterparty be final when effected.
(6) The central securities depository or central counterparty
should be cost-effective in meeting the requirements of participants
while maintaining safe and secure operations.
(7) The central securities depository or central counterparty
should evaluate the potential sources of risks that can arise when the
central securities depository or central counterparty establishes links
either cross-border or domestically to settle transactions or
[[Page 18453]]
clear trades, and ensure that the risks are managed prudently on an
ongoing basis.
(8) The central securities depository or central counterparty
should have governance arrangements that are clear and transparent to
fulfill public interest requirements and to support the objectives of
owners and participants and should promote the effectiveness of a
central securities depository's or central counterparty's risk-
management procedures.
(9) The central securities depository or central counterparty
should provide market participants with sufficient information for them
to identify and evaluate accurately the risks and costs associated with
using its services.
(10) The central securities depository or central counterparty
should establish default procedures that ensure that the central
securities depository or central counterparty can take timely action to
contain losses and liquidity pressures and to continue meeting its
obligations and should provide for key aspects of the default
procedures to be publicly available.
(11) The central securities depository or central counterparty
should ensure that final settlement occurs no later than the end of the
settlement day and should require that intraday or real-time finality
be provided where necessary to reduce risks.
(12) The central securities depository or central counterparty
should eliminate principal risk by linking securities transfers to
funds transfers in a way that achieves delivery versus payment.
(13) The central securities depository or central counterparty
should state its obligations with respect to physical deliveries, and
the risks from these obligations should be identified and managed.
(14) The central securities depository should immobilize or
dematerialize securities certificates and transfer them by book entry
to the greatest extent possible.
(15) The central securities depository should institute risk
controls that include collateral requirements and limits, and ensure
timely settlement in the event that the participant with the largest
payment obligation is unable to settle when the central securities
depository extends intraday credit.
(16) The central counterparty should measure its credit exposures
to its participants at least once a day and limit its exposures to
potential losses from defaults by its participants in normal market
conditions so that the operations of the central counterparty would not
be disrupted and non-defaulting participants would not be exposed to
losses that they cannot anticipate or control.
(17) The central counterparty should use margin requirements to
limit its credit exposures to participants in normal market conditions
and use risk-based models and parameters to set margin requirements and
review them regularly. Specifically, the central counterparty should--
(i) Provide for annual model validation consisting of evaluating
the performance of the clearing agency's margin models and the related
parameters and assumptions associated with such models by a qualified
person who does not perform functions associated with the clearing
agency's margin models (except as part of the annual model validation)
and does not report to such a person.
(ii) Review and backtest margin models and parameters at least
quarterly.
(18) The central counterparty should maintain sufficient financial
resources to withstand, at a minimum, a default by the participant to
which it has the largest exposure in extreme but plausible market
conditions.
(b) Designated financial market utilities that operate as central
securities depositories or central counterparties and for which the
Board is the Supervisory Agency must meet or exceed the risk-management
standards in Sec. 234.4(a). The Board, by order, may apply heightened
risk-management standards to individual designated financial market
utilities in accordance with the risks presented by the designated
financial market utility.
Sec. 234.5 Changes to rules, procedures, or operations.
(a) Advance notice.
(1) A designated financial market utility shall provide at least
60-days advance notice to the Board of any proposed change to its
rules, procedures, or operations that could materially affect the
nature or level of risks presented by the designated financial market
utility.
(2) The notice of the proposed change shall describe--
(i) The nature of the change and expected effects on risks to the
designated financial market utility, its participants, or the market;
and
(ii) How the designated financial market utility plans to manage
any identified risks.
(3) The Board may require the designated financial market utility
to provide additional information necessary to assess the effect the
proposed change would have on the nature or level of risks associated
with the utility's payment, clearing, or settlement activities and the
sufficiency of any proposed risk-management techniques.
(4) A designated financial market utility shall not implement a
change to which the Board has an objection.
(5) The Board will notify the designated financial market utility
of any objection within 60 days from the later of--
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it
requests for consideration of the notice.
(6) A designated financial market utility may implement a change if
it has not received an objection to the proposed change within 60 days
of the later of--
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it
requests for consideration of the notice.
(7) With respect to proposed changes that raise novel or complex
issues, the Board may, by written notice during the 60-day review
period, extend the review period for an additional 60 days. Any
extension under this paragraph will extend the time periods under
paragraphs (a)(5) and (a)(6) to 120 days.
(8) A designated financial market utility may implement a proposed
change before the expiration of the applicable review period if the
Board notifies the designated financial market utility in writing that
the Board does not object to the proposed change and authorizes the
designated financial market utility to implement the change on an
earlier date, subject to any conditions imposed by the Board.
(b) Emergency changes.
(1) A designated financial market utility may implement a change
that would otherwise require advance notice under this section if it
determines that--
(i) An emergency exists; and
(ii) Immediate implementation of the change is necessary for the
designated financial market utility to continue to provide its services
in a safe and sound manner.
(2) The designated financial market utility shall provide notice of
any such emergency change to the Board as soon as practicable and no
later than 24 hours after implementation of the change.
(3) In addition to the information required for changes requiring
advance notice in paragraph (a)(2) of this section, the notice of an
emergency change shall describe:
(i) The nature of the emergency; and
(ii) The reason the change was necessary for the designated
financial
[[Page 18454]]
market utility to continue to provide its services in a safe and sound
manner.
(4) The Board may require modification or rescission of the change
if it finds that the change is not consistent with the purposes of the
Dodd-Frank Act or any applicable rules, order or standards prescribed
under section 805(a) of the Dodd-Frank Act.
(c) Materiality.
(1) The term ``materially affect the nature or level of risks
presented'' in paragraph (a)(1) of this section means matters as to
which there is a reasonable possibility that the change could
materially affect the performance of clearing, settlement, or payment
functions or the overall nature or level of risk presented by the
designated financial market utility.
(2) A change to rules, procedures, or operations that would
materially affect the nature or level of risks presented includes, but
is not limited to, changes that affect the following:
(i) Participant eligibility or access criteria;
(ii) Product eligibility;
(iii) Risk management;
(iv) Settlement failure or default procedures;
(v) Financial resources;
(vi) Business continuity and disaster recovery plans;
(vii) Daily or intraday settlement procedures;
(viii) The scope of services, including the addition of a new
service or discontinuation of an existing service;
(ix) Technical design or operating platform, which results in non-
routine changes to the underlying technological framework for payment,
clearing, or settlement functions; or
(x) Governance.
(3) A change to rules, procedures, or operations that does not meet
the conditions of paragraph (c)(2) of this section and would not
materially affect the nature or level of risks presented includes, but
is not limited to the following:
(i) A change that does not modify the contractual rights or
obligations of the designated financial market utility or persons using
its payment, clearing, or settlement services;
(ii) A change to an existing procedure, control, or service that
does not adversely affect the safeguarding of securities, collateral,
or funds in the custody or control of the designated financial market
utility or for which it is responsible;
(iii) A routine technology systems upgrade;
(iv) A change related solely to the administration of the
designated financial market utility or related to the routine, daily
administration, direction, and control of employees; or
(v) A clerical change and other non-substantive revisions to rules,
procedures, or other documentation.
By order of the Board of Governors of the Federal Reserve
System, March 29, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-7812 Filed 4-1-11; 8:45 am]
BILLING CODE 6210-01-P